Home ListingDecember 14, 2015

Private Equity LPs Pay $2B a Year for 'Miscellaneous'

Researchers estimate transaction, monitoring, and other fees made up 4% of revenue over 20 years—and investors may not have tracked them.

Reported by Featured Author

Performance fees, or carried interest, may not be the only type of controversial private equity fees.

Private equity firms took home nearly $20 billion in transaction and monitoring fees, or 3.6% of all earnings, from some 600 acquired companies over the past two decades, according to academics.

These fees are not well documented and are often overlooked by companies and limited partners (LP), argued University of Oxford’s Saïd Business School’s Ludovic Phalippou and Christian Rauch, and Frankfurt School of Finance & Management’s Marc Umber.

“These fees are contentious because they are charged by GPs [general partners] to companies whose board is controlled by these same GPs,” they wrote. “LPs negotiate only on management fees, carried interest, and the fraction of portfolio companies fees that is rebated against the management fees due.”

According to the paper, these “portfolio companies fees” include not only transaction and monitoring fees, but also termination, director, commitment, financial advisory, and capital market fees. Even some business expenses such as the use of private jets are included in some deals, the authors said.

Specifically, the research found GPs took home $10 billion in transaction fees, $8.1 billion in monitoring fees, and about $1.5 billion in other fees from 1995 to 2013.

Furthermore, Phalippou, Rauch, and Umber said from 2008 to 2014, the largest four private equity managers (Carlyle, KKR, Blackstone, and Apollo) earned $16.5 billion of carried interest, $10.8 billion of management fees, and $2.5 billion in “net monitoring and transaction fees.”

The authors also applied these calculations to fees paid by the California Public Employees’ Retirement System (CalPERS), and said it would have paid $2.6 billion in portfolio company fees across funds with vintage years 1991 to 2008, “which they have not tracked so far.”

The $288 billion pension announced in November that it had paid $3.4 billion in performance fees for $24 billion in net gains since the private equity program’s inception in 1990.

“These fees are commonplace and are not a new phenomenon,” the authors wrote. “Even if these fees were to be 100% refunded to investors going forward, we note that the amounts charged are economically relevant and significantly impact the finances of a large number of corporations.”